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Self Managed Super Fund (SMSF) Article
Strategies for making $1 million super contributions

By Tony Negline.

This article may be out of date.

14th February 2007

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Every three to five years, the tax, super or social security rules are changed significantly thereby creating an unusually attractive opportunity for a group of investors.

Invariably the rule change involves removing an existing concession.

This year is no different.  The opportunity involves making undeducted contributions into super of up to $1 million before 30 June 2007.  From 2007/08 financial year onwards, the basic rule is that only $150,000 in undeducted contributions during a financial year will go into a fund tax-free.  There are some other important rules about undeducted contributions but we will not look at them now.

Many people are looking at this close-ended opportunity and are wondering what they can do to take advantage of it.  Here are a range of options to consider:

*   Home equity

Many people have most of their wealth tied up in the family home.  At a practical level it appears to be difficult to get money into super simply because the funds are not available.

There are however solutions to this problem.  You could organize a line of credit using the family home as security and then use the borrowings to make super contributions.  A significant disadvantage with this approach is that the interest payments have to be regularly made.

An alternative approach is to use a reverse mortgage.  These products provide a lump sum which can then be contributed into super.  Compared to the line of credit approach they have the advantage of capitalizing interest which means that the interest payments are added to the outstanding loan balance.  That said, capitalizing interest sometimes causes its own hassles.  In many cases the loan is repaid by your deceased estate.

* Selling assets

This is currently a popular area and if media reports are correct then a lot of people are selling their investment properties in order to make contributions to super.  In some rental markets these property sales are having a negative impact on weekly rents.  It is yet to be seen if this shock will be as great as the ‘bang’ created during the mid-1980s when the Labor Government temporarily removed interest deductions on residential property investments.

When assets are sold capital gains tax has to be paid and transaction costs also have to be taken into account.  Two very important points to remember for some investors are that the contribution to super would be net of CGT and the outstanding loan balance.  As the loan has been repaid the tax deductions available from the investment property (interest, repairs, agent fees, etc) will be lost which may mean that additional personal income tax has to be paid.

There are several alternative approaches to selling assets particularly if the asset is property.  Firstly an investment property investor may be able to use a reverse mortgage.  Without going into specifics, this can have two advantages.  This approach can reduce CGT.  It can also enable an investor to delay the sale of an asset if the sale price for the asset is unattractive.  This point is particularly important is especially important if the property market is down, as it is right now.

Secondly a residential property investor may be able to use a unit trust to hold their property assets and the super fund could be an investor in that unit trust.  This is a complex area and advice should be sought.  Furthermore this type of structure must be very carefully managed because it is easy to forget to do something which may cause the fund to become non-complying and therefore subject to penalties.  An important feature of these arrangements is that the residential property cannot be leased to related parties of the fund.

*    Retiring

Some investors are selling their businesses.  If they are eligible they might be able to get CGT exemptions on the sale of that business.  The frees up cash which can be contributed to super.  Current government rules might allow up $2 million in undeducted contributions.

*   Happy families

Some people are giving up to $1 million to their Mum and Dad and asking them to contribute it as undeducted contributions to super.  This strategy will only work if the parent is actually allowed to contribute to super.  The idea behind this plan is that from July 2007 onwards once the parent reaches 60 they are able to withdraw the funds tax-free.  If the parent starts a pension and is over 60 then the super assets will grow in a tax-free environment and the pension payments will also be tax-free.

One problem with this strategy is that it would impact a retiree’s access to government benefits such as the aged pension.  If the parent dies then the benefit can be paid to the child.

Another obvious problem is that the success of making this contribution and ensuring continued access to it very much depends upon the fragile nature of human relationships.

Other strategies can be employed in this area.  Once again we see the economic impact of tax changes.  All this is a bit scary when one considers that the new super laws have not been officially formalized.

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